Macro Monday:Global selloff triggered by China hard landing fears

Major macro themes of the past week.

A brutal week driven by China fears: Last week A-shares slumped 12%while H-shares dropped down 8%. China was at the centre of the globalmarket turmoil, as the disappointing Flash PMI and the earlier RMBdepreciation stoked hard landing fears. With slumping stock prices, manyinvestors expected a RRR cut by the PBoC over the weekend, which didn’thappen. Instead, on Sunday (Aug 23), the State Council approved thatChina’s pension fund (RMB3.5tn) could invest in the stock market with totalstock investment capped at 30% of its net assets.

Take a grain of salt on August’s Flash PMI: Global market was hit heavilylast Friday by the disappointing August Caixin Flash PMI, which dropped to47.1, the lowest reading since March 2009. It’s not the first time for the ChinaFlash PMI, compiled by Markit, to stir the global financial market. However, itstrack record suggests that the Flash PMI tends to lag, instead of lead, theimportant turning points of the Chinese economy, such as Sep 2012 and July2013. Meanwhile, the PMI is subject to seasonal adjustment, which is tricky todo. Just this Feb, the Flash PMI sent a questionably positive signal on China’seconomy, which we pointed out immediately back then (link). In any case, theover-interpretation of a single data point reflects the very weak sentiment inthe global financial market at this moment. That’s why few talks about the MNIChina sentiment indicator released last Thursday, which rose to a one-yearhigh in August. We suggest investors not to read too much into any of them.

The fear on China hard landing is overdone: Despite the marketturbulence, we remain comfortable with our call in 2H outlook that China’seconomy would have a U-shaped recovery from 2Q15 to 4Q15 (GDP: 7.0%,6.8% and 7.2% in yoy terms). In our view, policy makers are serious aboutdefending the 7% GDP growth target for this year. As such, they could rampup policy supports, particularly funding supply to major investment projects.

Meanwhile, with strong property sales since 2Q15, we also expect somemodest improvement in property investment from 4Q15. In Dec, policy makersmight adjust next year’s target even lower, probably to 6.5%.

More on China’s hard landing risks: Without doubt, China is more prone tohard landing risks compared with five years ago. During this period, China’stotal GDP rose from 40% of the US’s to over 60%. China’s GDP per capitaincreased by 80% and labour wages could rise even more than that. TheRMB has appreciated 30% against a basket of currencies. The propertysector, which was described as “Dubai times 1000” back then, has addedanother 70mn units of new home supply. That said, we reckon that it’s stillpremature to say that policy makers have run out of ammunition. Rather, thekey China risk for us is not a cyclical hard landing, but a long-term structuralslowdown. Old growth engines such as exports, property and low-endmanufacturing have almost run out of steam. To be sure, infrastructureinvestment could still grow 20% this and next year. But the total size ofChina’s infrastructure investment this year might exceed US$2tn, or roughlythe whole India economy. So it would slow down sooner or later. To sustain a4-5% long-term growth rate, China needs to find new growth engines, whichrequires completely different capital/labour markets and has to be driven bythe private sector. In other words, China’s past growth model needs a greatoverhaul, which is difficult both economically and politically to do.